AFM291 Chapter Notes - Chapter 13: Income Statement, Stock Split, Retained Earnings
28 Jun 2018
School
Department
Course
Professor
When the shares are paid in full, the subscribed amount is closed and actually issued
-
Making subscriptions receivable an asset account like A/R or contra equity account is based on
professional judgement
-
Refund the cash paid and cancel the contract
o
Issue a lesser number of shares to reflect the amount paid
o
Capital transaction and does not flow through net income
Funds retained are recorded through contributed surplus
Keep the money paid as penalty for defaulting on the contract
o
Also when accounting for defaulted contracts, three possible outcomes are
-
Bundled Sales
Companies can sell a basket of securities that includes two or more equity instruments
-
Two ways to do this
-
Sales price allocated proportionally to the components based on estimated fair value of
each component
a.
Relative fair value method also called the proportional method
1.
enterprise estimates the fair value of the components, then allocates amounts to these
components in descending order according to reliability of each component’s fair value
a.
Residual value method also called the incremental method:
2.
1,000 packages (one common share and one preferred), $100 each package. Market price of
common share was $91 and estimated fair value of the preferred share was $10
-
Relative fair value method
-
Considers market price of common shares to be measured more reliability than estimated
fair value
o
Residual value method:
-
Later in chapter 14, but bundled sales are for two or more equity instruments that are
normally sold separately but sold together in the particular instance
o
Compound financial instruments are not normally sold separately
o
Bundled sales are different from compound financial instruments
-
Share Issuance Costs
AFM 391 Page 5
Document Summary
When the shares are paid in full, the subscribed amount is closed and actually issued. Making subscriptions receivable an asset account like a/r or contra equity account is based on professional judgement. Also when accounting for defaulted contracts, three possible outcomes are o o o. Refund the cash paid and cancel the contract. Issue a lesser number of shares to reflect the amount paid. Keep the money paid as penalty for defaulting on the contract. Capital transaction and does not flow through net income. Companies can sell a basket of securities that includes two or more equity instruments. Relative fair value method also called the proportional method a. a. Sales price allocated proportionally to the components based on estimated fair value of each component. Residual value method also called the incremental method: enterprise estimates the fair value of the components, then allocates amounts to these components in descending order according to reliability of each component"s fair value.
